Asset Protection in Bankruptcy

What Does Asset Protection Mean?

It simply means protecting your property and keeping it out of the hands of  your creditors. Chapter 7 and Chapter 13 bankruptcy both permit you to keep things that matter. In bankruptcy, “asset protection” means making sure that you are fully using every right the law gives to you to keep the things you have worked hard for. Here are some of the ways bankruptcy law does that:

 

Exemptions and exemption planning: By law certain types and amounts of property cannot be reached by your creditors. This is what exempt property is– it is protected (“exempt”) from their reach. There are two main types:

  1. Personal property exemptions cover things such as your household goods and furnishings, bank accounts, vehicles, clothing, tools of your trade, life insurance,  etc.
  2. The Homestead Exemption protects the home you and your family live in.   The level of protection depends on how much it is worth,  how much you owe on it, who owns it, how it is owned, who lives there, your dependents, your and their ages, etc. “Real Property” means land (real estate).

 

Equity: “Equity” means the value of your home over and above what you owe on it. For example, a house worth $150,000 with a mortgage debt of $100,000 on it has $50,000 of equity. In Tennessee, a married couple owning a home together and having minor children have a homestead exemption of $50,000.

Keep in mind that you would not lose a home just because it might be worth even something more than the exact dollar amount of your homestead exemption. That is because the current real estate market and the costs and expense of trying to market a house are also important factors in determining whether there really  is any equity there at all.

Also, keep in mind that loan appraisals are frequently high and that you should not necessarily rely on them to determine what your property is actually worth.

Ownership–How and by Whom: How and by whom real or personal property is owned is another very important factor in understanding whether and how what you own is protected. In Tennessee, for example, husbands and wives  own property in a unique way called “Tenancy By the Entirety.” This often means that– even aside from or in addition to the homestead exemption discussed above– property you own with a spouse has an additional level of protection from creditors that only one spouse owes. It becomes very important, then, to examine exactly how things are owned and exactly who owes what.

Nature of Debt:  Debts can be individual or joint with another person. A loan or credit card only in your name is an individual debt. A co-signed loan or a joint credit card is a joint debt. (Credit cards may confuse you because, for example, an “authorized user”  on a credit card is not jointly liable and does not owe the debt.) As you can see,  determining who and what debt you actually  owe is a key factor in taking steps to protect your property.

Thinking About Transferring Assets? “Don’t try this at home!”: Sometimes people make the mistake of trying on their own to protect their property by “getting it out of my name.” That can be a huge and costly mistake–the people who wrote the bankruptcy laws were not born yesterday. You must disclose such transfers and most such transfers just for the purpose of getting it away from creditors can simply be reversed and undone and may get both you and the person you transferred it to in trouble. This does not mean, though, that there are no permissible transfers. This in one area where you absolutely must have careful, skillful and knowledgeable  legal advice.

Retirement Accounts: Most “qualified” retirement plans — such as 401(k) plans, IRAs etc.– are protected under federal law from your creditors.  Part of dotting our I’s and crossing our T’s in this area is making sure that what you have is such a protected account.

The Bottom Line: When you file for bankruptcy protection, whether Chapter 7 or Chapter 13, you are entitled to keep and protect important property. It is crucial to understand your rights. With careful guidance you can keep your home, tools or equipment necessary to conduct your business, bank accounts, vehicles, furniture, retirement accounts, clothing, life insurance policies,  etc.– in other words, the very things you are most worried about.

Guidance from a bankruptcy lawyer can help you determine what you can protect and how to protect it.  You worked hard for your property. You have every right to expect your attorney to work just as hard to protect it.
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